 |
|||||||||||||
Feature Article Traders and Mistakes Part 2: No-Rules Discretionary Traders by Van K. Tharp, Ph.D.
In my experience, when most people say “I am a discretionary trader,” it basically means that they are free to do whatever they want. They can take a newsletter recommendation, trade a high probability setup based on what some guru said in a workshop last year, or perhaps just buy something on a whim. They might feel they have 20 different systems with none of them rigid. In reality, they have no systems at all. What they really have is a little bit of nothing and a lot of “into-wishing” (as opposed to intuition). As a result of having no system and no rules, they have no way of effectively managing their trading. How well do you think a company would operate with no plans, no business systems and no rules? Because they have no rules to follow, everything no-rules discretionary traders do is a mistake. Now in fairness, some of discretionary traders have rules for at least a portion of their trading. There’s hope for these people because they have a starting point. Those who are totally no-rules discretionary traders, however, have no hope and should either stop trading or totally revamp their trading business. Are you a discretionary trader? How would you be able to tell? Here is a quiz that will help you decide. Answer Yes or No to the following questions.
If you answered Yes to as many as two of the questions above, you have some elements of a no-rules discretionary trader. However, if you answered Yes to 6 or more questions above, you definitely are a no-rules discretionary trader. Chances are you seldom make money in the market because you are not playing a winning game. You probably make many mistakes. In fact, since you don’t have rules, I would consider everything you do to be a mistake until you have a set of rules in place. How can you effectively learn from any of your trading experiences if you do not know which ones are mistakes? If it is any consolation, most traders fall into the no-rules discretionary category. The best among this group might be dedicated to following the trades of a single newsletter. If that applies to you, do you even know the rules of the newsletter? Does the newsletter writer have rules to guide his trading? Chances are, if he must come out with a specific recommendation once every month on a specific date, he doesn’t have such rules. And chances are also good that you don’t follow the recommendations of the newsletter writer exactly: you don’t take some trades, you may miss some others, you buy at a price other than that recommended, and you probably don’t sell when you are told to. Again, these are all signs of a no-rules discretionary trader. Next week, we’ll look at rules-based discretionary traders. Peak Performance Home Study YOU are the most important factor in your trading success! You create the results you want. Going through this home study course, you’ll gain a perspective on the "how" and "why" of your past trading results and learn tips and techniques to make your profits increase. Your success as a trader depends upon the amount of work you put into applying the principles of the course to your investing and trading. Buy now and take charge of your trading success!
Should the Flash Crash Change the Way You Use Stops? Part 2
Last week we talked about the psychological fallout from the May 6th “Flash Crash.” On that day, the huge swing in the afternoon caused many traders and investors to be stopped out of their positions—and some with very large slippage. As a result, these folks were out of their positions when the market rebounded only minutes later. That event led many to ask, “Should I quit using protective stops altogether or at least change to close only stops?” Let me reiterate my answer to the first question: protective stops, along with proper position sizing techniques, are the trader’s main line of defense against taking too much risk in any given trade or investment. For practically all types of trading, the protective stop is a mandatory part of trading discipline. With that said, let’s dig into some research to see if Market on Close (MOC) stop orders might perform better for traders. Data Analysis Shows the Way In Part 1 of this article series, we covered the advantages and disadvantages of using MOC stops. We learned that one has to balance two possibilities:
There are many approaches to take if we want to investigate the usefulness of MOC stops versus standard market stop orders. To make the study simpler, I chose to look at getting stopped out of long trades—an issue that affects most market participants (i.e., investors, long-term traders, and swing traders). So here’s the methodology:
Some Surprising Results Some interesting stats came out of the test:
So an MOC stop
The evidence, therefore, overwhelming favors protective stops over MOC stops if your main goal is to protect your positions against outsized losses on days with extreme moves. Note: This study in its current form does not in itself form a definitive case against MOC stops. Interestingly, this study also clearly points out a pervasive psychological biases—recent event bias. Our brains tend to value a recent significant event much more strongly than past significant events or even a preponderance of data. So the fact that some positions were stopped out on a nasty drop-and-reverse day may have caused a knee-jerk reaction in some traders and investors. To switch to only MOC stops, however, looks to be a solution for a problem that is quite rare. Again, for most traders working in intermediate and longer time frames, standard protective stops appear to be the most prudent choice. Great Trading,
Filling in the Gaps Q: My book shelves and laptop are full of trading information, e-books, and past courses on DVD and hard copy formats. However, Im still not a profitable trader. I believe I've put the hours in and have tried several strategies and techniques with little success. Which of your products would you recommend to enable me to pull this stuff together and fill in the obvious gaps in my trading abilities? A: What you work on is more important than how much work you do. I recommend that everyone entering my Super Trader program spend their first year or more working on themselves and even suspend trading until they've completed the following home study course and workshops:
After the self-work, I ask that they develop a business plan using the processes from the following workshop and CD series:
With a business plan complete, I then request that they develop three systems that meet the following criteria:
Finally, they need to be able to document trading their systems at 95% efficiency or better. Van
Ask Van... Everything that we do here at the Van Tharp Institute is focused around helping you improve as a trader and investor. Therefore, we love to get your feedback, both positive and negative! Email UsEmail us [email protected] To end your subscription look at the very bottom, left corner of this email and click on that link. That section will also let you know which email address was used to send the newsletter. |
May 26, 2010 - Issue 476
Trouble viewing this issue?
Tharp Concepts Explained...
New Picking the right stocks has nothing to do with trading success and neither do amazing trading systems with high percentage wins. The Position Sizing Game teaches you the key elements of trading success. Learn more. To Download for Free or Upgrade Click Here
Follow Van through
|
||||||||||||
